Haydn J. Richards, Jr

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NMLS Licensing Form Updates and
Enhancements for 2014 and Beyond
NMLS Annual Conference & Training: February 19, 2014
Haydn J. Richards, Jr.
California | Illinois | Michigan | Minnesota | North Carolina | Texas | Washington, D.C.
www.dykema.com
Goals
• Update the Group concerning changes to Control and Control
Person definitions through the NMLS Rulemaking Process
• Provide an update concerning what Licensees are doing in
order to help “jump start” the discussion concerning control
and control persons
• Discuss how Licensees are navigating control and control
person challenges, including how differing state
interpretations impact daily life of licensing personnel
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Who is in Control? What does Control mean?
• Prior to 2008, licensees generally were asked to identify their
key executive officers, directors, and 10% or more direct and
indirect owners
– General expectation was that licensees would identify the
following executive officers: President, key Vice
Presidents, Treasurer, and Secretary
– Variance between state regulatory agencies existed (e.g.,
Virginia)
– Differing approaches to disclosure of key persons meant
that many licensees disclosed different individuals to
different regulatory agencies (i.e., core set of individuals to
each state, supplemented by additional individuals)
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Historical Background: 2008 – 2010
• With the advent of the NMLS, standardization of disclosure of
control persons moved forward
• NMLS requests that entities disclose their “Control Persons”
• Original forms requested disclosure of the Chief Executive
Officer, Chief Financial Officer, Chief Legal Officer, Chief
Operations Officer, and individuals in similar capacities
– Also requested disclosure of “control persons” (i.e.,
individuals that have “control” over an entity
• Control previously was defined as “the power, directly or
indirectly, to direct the management or policies of a company,
whether through ownership of securities, by contract, or
otherwise.”
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Current NMLS Definitions Relating to Control
• Development and Release of NMLS Policy Guidebook
provides further instruction to licensees
• Immediately past release augmented and clarified who
regulators expect to be disclosed
–
The power, directly or indirectly, to direct the management or policies of a company, whether through
ownership of securities, by contract, or otherwise. Any person that (i) is a general partner or executive
officer, including Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal
Officer, Chief Credit Officer, Chief Compliance Officer, director, and individuals occupying similar positions or
performing similar functions; (ii) directly or indirectly has the right to vote 10% or more of a class of a voting
security or has the power to sell or direct the sale of 10% or more of a class of voting securities; (iii) in the
case of an LLC, Managing Member; or (iv) in the case of a partnership, has the right to receive upon
dissolution, or has contributed, 10% or more of the capital, is presumed to control that company.
• State laws also changed around this time to require prior
approval in connection with control person changes
– Nebraska, North Carolina, etc.
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NMLS Request for Comment & Result
• Commenters expressed concerns over the definition of
“control,” determining individuals who meet this definition, and
the resulting obligations imposed upon those individuals
– These comments were not new to the regulatory agencies;
such comments have been voiced previously
• NMLS Policy Committee acknowledged that there can be
fundamental disagreements between regulatory agencies and
licensees concerning which owners are in “control” and which
key personnel constitute “control persons” that require
disclosure on the NMLS
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NMLS Request for Comment & Result
• NMLS Policy Committee will work with state regulators and
industry participants to develop a definition, guidance and
functionality for the term “control” in NMLS that:
– Generally satisfies state reporting requirements in a
uniform manner; and
– Allows state regulators to obtain information through
NMLS without imposing burdens for other state reporting
requirements
• Issues raised around “control” will be separately considered in
2014 with possible changes to the Forms and guidance
implemented after review and adoption
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What Does this Mean? Why is this Relevant?
• No Changes Made to Control or Control Person as a result of
Request for Comment
• Regulatory agencies will actively consider input from Industry
concerning control and its impact to licensees
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What Has Industry Done in the Past?
• Very little. A small number of participants sent in comments.
• Generally, Industry response involved complaining and
voicing general discontent
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What has Industry done? Why the Change?
• Industry is embracing its opportunity to provide feedback to
State Regulatory Agencies and achieve a successful
refinement of what constitutes “control” and “control persons”
• Compliance burden on industry has grown significantly; being
proactive allows industry to better manage compliance
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Steps to Success (2013 - Present)
• Industry established an informal group of participants after the
2013 AARMR Conference
– Industry members provided feedback concerning the
control person disclosure process and its difficulties
– Certain industry members have taken the lead in the
control person evaluation process
– Opportunities to participate still exist
• Update regarding Industry Efforts
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Steps to Success (Current and Future)
• NMLS Conference: Delivery of First Reports
• On or around April 4, 2014: All State Reports Delivered to
Regulatory Agencies
• On or around April 21, 2014: Summary of Overall Findings
Delivered to CSBS and State Regulatory Agencies
• Joint Industry and Regulatory Agency Working Group to commence
meetings. Group to have multiple collaborative functions and goals:
– Re-evaluation of Review Process:
• Industry Process has identified “choke points” and challenges
that interfere with daily life as it pertains to control persons
• Working group to collectively work to streamline diligence
processes of various states
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Steps to Success (Current and Future)
• Industry Members have taken the lead on identifying
states that impose burdensome requirements
• Comprehensive report to be submitted on or around
April 21, 2014 will include requests for reconsideration
of state processes
• Regulatory Agencies will identify essential information
that is needed to ensure consumer safeguards, with
individual NMLS questions assumed to be a floor (but
also subject to consideration for review)
– Industry members to provide comprehensive report on
successes achieved in streamlining processes in the
various states
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Steps to Success
• Discussion to expand to “control”/ownership
– Industry to provide practical discussion for what “control”
through ownership means in daily life
• Provides Regulatory Agencies with a liaison to Industry
Members vis-à-vis control person trends, etc.
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Report on Industry’s Actions To Date
• Comprehensive, state-specific analysis of control person
disclosure process
• Regulatory Agencies are receiving a comprehensive report,
on a rolling basis, summarizing the information that is required
as part of their disclosure process
• Rating Scale:
•
•
•
•
Burden Consistent with Common Practices of State Regulatory
Agencies
Burden Exceeds Common Practices of State Regulatory
Agencies
Burden Significantly Exceeds Common Practices of State
Regulatory Agencies
Burden Significantly Exceeds Common Practices of State
Regulatory Agencies and Burden Impacts Licensee Behavior
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Report on Industry’s Actions To Date
• At least 115 Fields of note on NMLS Individual Form
• Form served as the baseline/floor for Industry Review
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Report on Industry’s Actions To Date
Sample State Report with Walkthrough
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Report on Industry’s Actions To Date
Sample State Findings Summary
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What Constitutes “Control” through Ownership of
a Licensee?
• With respect to ownership, control is defined as:
–
The power, directly or indirectly, to direct the management or policies of a company, whether
through ownership of securities, by contract, or otherwise. Any person that . . . (ii) directly or
indirectly has the right to vote 10% or more of a class of a voting security or has the power to
sell or direct the sale of 10% or more of a class of voting securities; (iii) in the case of an
LLC, Managing Member; or (iv) in the case of a partnership, has the right to receive upon
dissolution, or has contributed, 10% or more of the capital, is presumed to control that
company
• In the NMLS, at the Indirect Owner stage, licensees are
instructed to disclose:
–
–
–
When the owner is a corporation, each shareholder that beneficially owns, has the right to
vote, or has the power to sell or direct the sale of, 25% or more of a class of voting security
of that corporation
When the owner is a partnership, all general partners and those limited and special partners
that have the right to receive upon dissolution, or have contributed, 25% or more of the
partnership’s capital
When the owners is a LLC, (1) those members that have the right to receive upon
dissolution, or have contributed, 25% or more of the LLC’s capital; and (2) if managed by
elected or appointed managers, all elected or appointed managers
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What Constitutes “Control” through Ownership of
a Licensee?
• Licensees are instructed to continue through the chain of
ownership and list all 25% or more owners at each level of
ownership unless and until the licensee reaches:
– A company whose shares are publicly traded
– A natural person
– A Credit Union regulated by an appropriate regulatory
agency
– A bank or bank holding company regulated by an
appropriate regulatory agency
• In many instances, tracing ownership through to such an
extent is not relevant to the “control” of a licensee
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When Control Disclosure Requirements Do Not Make Sense – Scenario 1
Various Independent
Owners
(Not Holding 10% or More
Ultimate Ownership)
Indirect Ultimate Owner
(43.875% Indirect
Ownership)
Various Independent
Owners
(Not Holding 10% or More
Ultimate Ownership)
Natural Person
(.75% Indirect Ownership;
Disclosure Required)
Indirect Owner
(Corporation)
Indirect Owner
(67.5% Indirect
Ownership)
Indirect Owner
(Corporation)
Indirect Owner
(Corporation)
Direct Owner
(Corporation)
Direct Owner
(Corporation)
Licensee
(Corporation)
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When Control Disclosure Requirements Do Not Make Sense – Scenario 2
President, CEO & 100% Owner
Employee 2
Employee
6
Employee 4
Employee 1
Employee 3
Employee 5
Employee
7
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Questions?
Questions?
Haydn Richards
Dykema Gossett PLLC
1300 I Street, N.W.
Suite 300 West
Washington, DC 20005
[email protected]
(202) 906-8602
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